2018 Guide to Effective Proxies

6 TH EDITION | GUIDE TO EFFECTIVE PROXIES 372 2 BOARD OF DIRECTORS 4 AUDIT COMMITTEE MATTERS 5 OTHER MANAGEMENT PROPOSALS 6 INFORMATION ABOUT THE MEETING 1 CORPORATE GOVERNANCE AT MICROSOFT 3 NAMED EXECUTIVE OFFICER COMPENSATION The chart below summarizes key attributes of each pay element, its share of target annual compensation, and key updates for fiscal year 2017. Element Attributes Key updates for fiscal year 2017 Base salary <10% Aligns with scope and complexity of role and prevailing market conditions; salary levels are generally at or below market median Cash incentive <20% FY17 metrics Financial / formulaic (50%) • Incentive Plan revenue (25%)* • Incentive Plan operating income (25%)* Qualitative performance categories (50%) • Product & strategy (16.67%) • Customers & stakeholders (16.67%) • Culture & organizational leadership (16.66%) Structured framework instituted for all NEOs 50% determined formulaically based on pre-established financial targets Performance-based stock >35% FY17 quantitative metrics • Commercial cloud revenue (34%) • Commercial cloud subscribers (33%) • Windows 10 monthly active devices (11%) • Surface gross margin (11%) • Consumer post-sales monetization gross margin (11%) Maximum payout reduced from 300% in 2016 to 200% in 2017 , before relative TSR multiplier** Quantitative metrics refined to directly align with our three ambitions , reduce overlap with annual cash incentive goals, and drive long-term growth Time-based stock >35% Vests over four years to support retention and align with our shareholders’ interests * “Incentive Plan revenue” and “Incentive Plan operating income” are defined in Annex A. ** The relative TSR multiplier is triggered only if Microsoft’s TSR is positive and above the 60th percentile of the S&P 500. If earned, the relative TSR multiplier can increase the PSA shares awarded by up to 50%. Fiscal year 2017 cash incentives. Target cash incentives for our Named Executives were approved in September 2016. Target amounts ranged from 200% to 300% of base salary earned in fiscal year 2017. The maximum possible cash incentive was 200% of the target and the maximum result for each financial measure or performance category was 200% of target. The Incentive Plan Revenue and Incentive Plan Operating Income performance targets for the cash incentives were based on achieving the Company’s 2017 operating budget approved by the Board and reflecting appropriately ambitious performance goals. Fiscal year 2017 PSAs. PSAs were granted in September 2016 for a target number of shares of Microsoft common stock. The number of earned shares under the fiscal year 2017 PSAs will be determined after the 3-year performance period ending June 30, 2019 based on performance metrics for the performance period. Earned PSA shares vest following conclusion of the 3-year performance period, ensuring a focus on longer-term success. Fiscal year 2017 PSA performance metrics are strategic measures that align with our three ambitions and are aimed at driving new growth areas for our commercial and consumer businesses. These metrics were selected because they address areas that support long-term growth of our business, focusing on our emerging growth opportunities. The Compensation Committee is committed to setting rigorous performance goals, with the guideline that the probability of achieving the target result ranges from 40% to 60% . The metrics are reassessed, and targets set, annually because of the dynamic technology markets in which Microsoft operates. As a result, during the three-year performance period, separate targets are established for each year of performance. In establishing metrics, the Committee is mindful of the importance of balancing the business need for flexibility and long-term accountability. 2017 PROXY STATEMENT 35 MICROSOFT CORPORATION